This week's interesting finds

This week in Charts 

China house prices down on month-to-month for the first time since 2015

China expands property tax trials in next step of ‘common prosperity’ drive  

A property tax could alter China’s economic model, reshaping government revenue streams from land sales to taxes and deterring property speculation. 

Many tax specialists and economists believe it will help wean local governments off their chronic dependence on selling and leasing public land to developers. This relationship has contributed to widespread property speculation and pushed land and house prices higher in a cycle that many experts believe is unsustainable. 

According to research group Capital Economics, an effective tax rate of 0.7 per cent of the total property value would have generated Rmb1.8tn ($282bn) last year in China. 

That compares to Rmb1.6tn local governments generated in net revenue from land sales, after paying billions of dollars in land transfer expenses including compensation payments. The tax, and subsequent pressure on prices, could also help dent the appeal of property investment, redirecting private capital towards sectors such as high-tech exports and services that boost domestic consumption, according to its proponents.   

Traders Bet Tesla Stock’s Rally Isn’t Over Just Yet  

Traders are swarming the market for Tesla Inc. options to bet on a continued stock rally. Almost one out of every two dollars spent in the U.S.-listed options market through Wednesday went to Tesla options, according to Cboe (Chicago Board Options Exchange) Global Markets. 

By one measure, activity in Tesla options has surpassed trading in its shares. More than $900 billion in Tesla options have changed hands this week, roughly five times the total for its shares, according to Cboe and FactSet data through Wednesday. 

Tesla options have morphed into one of the biggest casinos on Wall Street because the value of bullish call options can rapidly multiply if the stock advances, as it has for much of the past two years. That translates to quicker and bigger profits for traders than if they had just bought the stock. 

Call options tied to the shares jumping to $1,100 or $1,200 have been among the most popular trades recently, according to data from Shift Search. On Thursday, calls pegged to the shares advancing to $2,000 were actively traded.

Invitation Homes Boosts Rents 11% as Housing Shortage Persists  

Invitation Homes Inc., which owns more than 80,000 single-family rentals, raised prices by nearly 11% in the third quarter, according to a statement. The company boosted rents by 8% on renewals and 18% when leasing homes to new tenants. Rates are rising fastest in the Southwest, where rents increased 30% on new leases in Las Vegas, and 29% in Phoenix. 

“It’s a little bit crazy,” Chief Executive Officer Dallas Tanner said on a conference call with investors Thursday. “There just isn’t enough quality housing available right now.” 

Rising rents have been a staple of the economy since early Covid lockdowns lifted in the middle of last year. Surging purchase prices have pushed homeownership out of reach for first-time buyers.

Internal vs. External benchmarks 

 Accomplishments have a cost basis. What you gain or lose is always relative to where you began. And since we all begin at different spots, there’s a range in how people feel when experiencing the same thing. 

In his book on the final days of World War II, Stephen Ambrose writes about a wounded American soldier who’s carried back to the medic tent. He knows he’s going home – his war is over. “Clean sheets boys!” he yells back to his comrades still fighting. “Clean sheets, can you believe it! Clean sheets!” Living in foxholes for weeks caused soldiers to daydream about normal life, and few things tickled their imaginations like the dignity of clean sheets. Not money or status or respect or glory. Just the absolute pleasure of clean sheets. It’s an extreme example of when the outside world ceases to exist and everything becomes relative to an internal benchmark. 

A lighter version of this happens in business and finance, which are home to so many staggeringly successful people whose lives are broadcast over a staggeringly loud social media system. 

Pretending to be “frozen”  

“We invested in Upstart 4 days ago and it is up by 25%. What does Upstart Do?” 

“I am sorry, you are breaking up…”

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This Week in Charts 

Screening at Canadian Airports 

Japan’s carbon goal is based on restarting 30 nuclear reactors 

Japan’s goal of reducing carbon emissions by 46% by 2030 is based on the assumption it will restart 30 of its nuclear reactors, a top ruling party executive said. 

Akira Amari, secretary-general of the Liberal Democratic Party, made the remarks Sunday in a televised debate broadcast by NHK ahead of the Oct. 31 general election. 

The LDP has also been promoting the idea of building small modular reactors, saying they are safer than Japan’s existing atomic plants. Amari said Japan was in a particularly difficult situation in meeting carbon targets because it has no power links with other countries and doesn’t have reliable prevailing winds. 

Is it an investment? Is it a game? No, it’s eToro

The internet, cryptocurrencies, user-friendly trading platforms, and a pandemic-induced glut of spare time have gelled into a perfect storm that has redesigned retail trading as something that feels more like a game, and has transformed social-media friendly investors into quasi-influencers.

Israeli trading platform eToro, which launched in 2007, has been pioneering what the industry calls “social trading” features for over a decade. Users on the platform can follow other traders, check out their performances over time and, if they are keen, copy them. The most copied popular investors are rewarded by eToro with perks and a monthly payment.

As the world’s health conditions deteriorated – to wit: during the Covid-19 pandemic – more and more people popped up on eToro. In the first quarter of 2021, the platform gained more than three million new users, passing 20 million global users in June 2021. “I do see it increasingly among the younger generations: they have a sort of ‘don't care’ attitude towards losing their money, towards investing in risky things,” Smith says. “This meme culture and joking about their investments – I think it's gonna be a strange future, but I'm excited for it as well.”

Inconvenient Truths 

In 2020, U.S. natural gas prices hit the lowest levels since the mid-1990’s, driven by the emergence of advantaged shale gas basins, the overcapitalization of the shale oil industry, and a short period of disequilibrium while incremental demand from LNG and chemical plants came online. Fifteen months later, prices are at their highest seasonal level since 2008 as associated gas from shale oil has declined and as global demand for gas causes U.S. LNG facilities to run at full capacity. So much for “perpetual sub-$2.50 gas.” 

While prices and availability will normalize over time, the current environment exposes a number of realities which run counter to conventional wisdom and highlight the risks of allowing politics and ideology to interfere with scientific debate and economics. Specifically, there are three interrelated topics that deserve special consideration: 

• Raw materials are integral to the Energy Transition. Creating the energy complex of the future will require raw materials. In this piece, we’ll focus on natural gas which is a key enabler to reducing carbon emissions today and keeping energy prices in check while we invest in the technology and infrastructure necessary to attain net zero in the future.
• The Energy Transition will be inflationary. The inherent limitations of renewables, rising input costs driven by geology and capital scarcity (see point 3 below) and the introduction of carbon pricing will result in structurally higher energy prices going forward.
• The Hypocrisy of Divestment and ESG Investing. Refusing to invest in responsibly sourced enabler commodities increases global emissions while exacerbating income inequality on a global basis, thus resulting in outcomes that run directly counter to the stated objectives of these policies. 

It Don't Come Easy - The Energy Crunch, Decarbonization Goals, Forecasts, And Putin

Given all the talk lately about ESG, decarbonization, and the rise of renewables, it may come as a surprise to learn that the U.S. Energy Information Administration’s (EIA) reference- or base-case forecast for global energy sees substantial increases in natural gas supply and demand over the next three decades. 

In that report, which was released earlier this month, the agency said that under its base case — and (importantly) “absent significant changes in policy or technology” — global annual energy consumption will increase by nearly half (to just under 900 quadrillion Btu, or qBtu) by 2050. 

With that caveat about the base case in mind, EIA said that demand for petroleum and other liquid fuels will grow by 36% by 2050 and remain the world’s largest primary energy source. EIA’s base case sees energy-related CO2 emissions increasing to well over 40 billion MT/year by 2050 (left graph). That doesn’t sound much like decarbonization. 

Putin’s Fools Rush In 

Earlier this week, Ursula von der Leyen descended from on high, tablets in hand, to deliver a somber message to the shivering masses of the Old Continent. According to euronews, von der Leyen has grave concerns about the energy crisis currently befalling Europe. 

To believe von der Leyen, Europe’s energy conundrum is an immaculate crisis, conceived without any consummation by the European elite. They just woke up one day to find they were importing 90% of their natural gas needs. That Russia now controls their energy future is nothing more than a random and unfortunate event beyond anybody’s control. With no rooms left in the inn, Europe will just have to settle for Putin’s manger. 

Better still is her proposed solution to this newfound shortage of baseload power. According to von der Leyen, what Europe needs now isn’t a rejuvenation of its fledgling nuclear power industry, nor systematic investment in domestically produced natural gas. Instead, Europe needs more intermittent power! There’s a hurricane coming, and Europe needs to board up its windows. No hammers, you say? Quick! Buy more saws! 

Inflation

This week in charts

This week in charts

Money has never been this cheap

Citing “inflation” on Earnings Calls

Container shipping by vessels

60/40 Portfolio VS Inflation

The recent synchronized selloff in U.S. equities and Treasuries was likely just the beginning of what’s to come for the popular 60/40 stock-bond portfolio strategy, a growing chorus of Wall Street strategists warn.  

 

Underpinning all these warnings is an economy that’s now facing mounting inflationary pressures after spending years warding off the threat of deflation. During the last two decades, subdued growth boosted the allure of the 60/40 strategy, one that’s built on a negative stock/bond correlation where one serves as buffers for the other. 

 

With inflation fears raging, the worry is the Federal Reserve will seek to slow down the economy and rising rates will spell trouble for both bonds and stocks. September offered a taste of the pain, with a Bloomberg model tracking a portfolio of 60 per cent stocks and 40 per cent fixed-income securities suffering the worst monthly drop since the pandemic started in early 2020.

Do you have a Financial Therapist?

The Financial Therapy Association, founded in 2009, now has 317 members, a 51% increase in just four years. This spring the CFP (Certified Financial Planner ) Board broke precedent by adding the psychology of financial planning as a new “principle knowledge topic” required for study and continuing education to be a certified financial planner.

 

The Financial Therapy Association defines this approach as a process “informed by both therapeutic and financial competencies that helps people think, feel, communicate and behave differently with money to improve overall well-being through evidence-based practices and interventions.”

 

Its founding president, Sonya Lutter, believes that RIAs and wealth managers will inevitably either have financial therapists on staff or routinely refer clients to therapists just as they refer clients to estate planning specialists or accountants. 

Hedge funds cash in on energy stocks

Hedge funds have been quietly scooping up the shares of unloved oil and gas companies discarded by environmentally minded institutional investors and are now reaping big gains as energy prices surge.

 

Hedge fund managers in the US and UK have been betting that the eagerness of many big institutions to be seen to embrace environmental, social and governance (ESG) standards means they are selling wholesale out of fossil fuel stocks, even though demand for some of these products remains high.

 

“It’s such a great and easy idea,” Crispin Odey, founder of London-based Odey Asset Management, told the Financial Times.

 

“They [big institutional investors] are all so keen to get rid of oil assets, they’re leaving fantastic returns on the table,” added Odey, whose European fund is up more than 100 per cent so far this year.

 

Alongside Odey’s fund, Goldman Sachs’s prime brokerage division, which provides a range of services such as stock lending and execution, recently told clients that energy stocks had had their biggest net buying by hedge funds since late February, according to a note seen by the FT.

 

This week in charts

Chinese house market

Teens' behaviour

India coal crisis 

Indian utilities are scrambling to secure coal supplies as inventories hit critical lows after a surge in power demand from industries and sluggish imports due to record global prices push power plants to the brink.

Rising oil, gas, coal and power prices are feeding inflationary pressures worldwide and slowing the economic recovery from the COVID-19 pandemic.

"The supply crunch is expected to persist, with the non-power sector facing the heat as imports remain the only option to meet demand but at rising costs," ratings agency S&P's unit CRISIL said in a report this week, adding it expected Asian coal prices to continue to increase.”

Coal prices from major exporters have scaled all-time highs recently, with Australia's Newcastle prices rising roughly 50% and Indonesian export prices up 30% in the last three months.

German workers strike for higher pay

Increasing numbers of German workers are demanding higher pay amid rising inflation, with some going on strike, causing economists to worry that widespread demands for higher wages could start a self-fulfilling inflationary spiral in Europe’s biggest economy

German inflation rose to a 29-year high of 4.1 per cent in September, while in the 19-countries that share the euro it accelerated to a 13-year high of 3.4 per cent, official data showed on Friday. Lifted by soaring energy prices, that is higher than the 3.3 per cent rate expected.

“Inflation in Germany keeps going up,” said Frederic Striegler, an official at the country’s biggest union, IG Metall, explaining its demand for a 4.5 per cent pay increase and extra early retirement funds for wood and plastic workers at Carthago and other companies in the Baden-Württemberg region of southern Germany.

Unions are making similar pay demands for German workers in other areas, such as banking and in the public sector. This week, retailers and mail order companies in the Hesse region agreed to raise their workers’ pay by 3 per cent this year and a further 1.7 per cent in April next year.

Nature shows how extremes leads to extremes

2017 brought one of the wettest winters California had seen in recent memory. It was called a super bloom, and it caused even desert towns to be covered in green. That seemed great, but it had a hidden risk: A dry 2018 summer turned that record vegetation into a record amount of dry kindling to fuel new fires. So, record rain led to record fire.

The point is that extreme events in one direction increase the odds of extreme events in the other. Record good leads to record bad – just like California’s fires. And isn’t it the same in the stock market? And in business? Energy went from negative prices last year to global shortages today. NYC rents went from plunging to surging. Shortages lead to gluts; busts seed the next boom.

The most astounding force in the universe is obvious. It’s evolution. The real magic of evolution is that it’s been selecting traits for 3.8 billion years. The time, not the little changes, is what moves the needle. Take minuscule changes and compound them by 3.8 billion years and you get results that are indistinguishable from magic. And isn’t it the same in investing? If you understand the math behind compounding, you realize the most important question is not “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?” 

 

This week's interesting finds

The price of long-term outperformance 

When it comes to meeting long-term financial goals, the sad reality is that many investors don’t get there. How they feel today influences the decisions that affect them in the years to come, and they often make avoidable, emotion-driven mistakes. The discomfort of being different from the crowd, watching their investments underperform or jumping on the latest "hot" market trend are among the pressures investors face regularly. 

Humans evolved as herd animals, so departing from the safety of the crowd is fighting against an instinct ingrained over thousands of years. 

However, while summoning rare emotional discipline is hard, it’s not impossible. First, having an advisor who keeps things in perspective is key to staying calm through difficult times. Second, finding an investment approach you can understand, believe in and commit to for the long term is also important. The road to compounding wealth isn’t smooth, so it helps to have a map that shows you the way.   

This week in charts

Lenders haven’t taken this much risk (or whatever the title I gave you was)   

Axing the ESG buzzword 

Some of Europe’s largest asset managers are starting to drop the once-ubiquitous ESG label from their company filings. They’re concerned that regulators will no longer tolerate vague descriptions of environmental, social and governance investing.

Europe’s landmark anti-greenwash rulebook is reining in an industry that ballooned to more than $35 trillion last year. The Sustainable Finance Disclosure Regulation (SFDR) was enforced in March, but already in the lead-up to its arrival, European investment managers stripped the ESG label off $2 trillion in assets in anticipation of stricter rules.

Europe’s anti-greenwash rules contain some key sub-clauses that are forcing the asset management industry to substantiate their ESG claims. SFDR contains an Article 8 to define “light” green assets, and an Article 9 for “dark” green assets. The shade of green refers to the degree of importance accorded to ESG concerns. The EU is still working on more detailed descriptions of what the Articles may contain to stamp out any lingering mislabeling.

The adjustments sweeping through Europe’s asset management industry are beginning to make their way to the U.S., where ESG-labeled investment products this year surpassed those in Europe for the first time. Globally, ESG assets are on track to exceed $50 trillion by 2025, according to Bloomberg Intelligence.  

Individual investors choose options over stocks 

According to CBOE (Chicago Board Options Exchange) Global Markets data, nine of the 10 most active call-options trading days in history have taken place in 2021. Options Clearing Corp.’s figures show that almost 39 million option contracts have changed hands on an average day this year, up 31% from 2020 and the highest level since the market’s inception in 1973. 

So far this month, single-stock options with a notional value of roughly $6.9 trillion have changed hands, well above the $5.8 trillion in stocks that traded, according to Cboe data through September 22.
To date in 2021, the daily average notional value of traded single-stock options has exceeded $432 billion, compared with $404 billion of stocks, according to calculations by Cboe’s Henry Schwartz. Cboe’s data, which goes back to 2008, shows that this would be the first year on record that the value of options changing hands has surpassed that of stocks.   

Shortage of workers in U.K. 

BP Plc, the U.K.’s second-largest fuel retailer, said it’s shutting some of gas stations because of a nationwide truck driver shortage that’s threatening to derail the country’s economic recovery. Exxon Mobil Corp. also said that a “small number” of the 200 sites it operates for the supermarket Tesco Plc have been affected by the truck driver shortage. 
The shortage of drivers and other workers hamstrung the U.K. food industry earlier this year, with stores running low on basics like milk and bread, tens of thousands of extra pigs piling up on farms, and retailers warning that there will be shortages of some products at Christmas. 
The energy crisis has also ended up hammering the food industry. High gas prices last week forced fertilizer maker CF Industries Holding Inc. to close two plants that make carbon dioxide as a by-product. That posed an imminent threat to the food industry, which uses the gas to stun pigs and chickens for slaughter, as well as in packaging to extend shelf-life and the “dry ice” that keeps items frozen during delivery.   

The death of profit 

GFL Environmental Inc. went public in March 2020, and in the 18 months since, its share price on the Toronto Stock Exchange has almost doubled. The irony here is that GFL doesn’t make money. In fact, the company loses a lot of it. Over the past three fiscal years, GFL’s net losses have totaled $1.9-billion. It’s a common mindset lately. For all its hype, Uber Technologies Inc. has never made money – actually, it’s lost US$19-billion over the past five years. Streaming giant Spotify Technology SA has lost €2.6-billion ($3.8-billion) over the same period. There are now so many high-profile money-losers that Goldman Sachs recently created a Non-Profitable Technology Index, and its value soared when the pandemic hit. 

“The amount of capital out there has made it acceptable to lose money for a longer period of time, in the hopes that eventually you tip the market and become a near monopolist, or at least a duopoly,” says Martin Kenney, a professor at the University of California, Davis.